January 12, 2010

Fridge Maker and Government Have Frosty Face Off

Sidley Austin partner Roger Martella Jr. was doing his best to convey the gravity of his client's case. Standing before U.S. District Judge John Bates of the District of Columbia yesterday, he explained it was the first time that LG Electronics had ever sued a government. A loss could result in lasting damage to its reputation among consumers, he said. And the time to act, he added, was running out.

The cause the company’s consternation? The uncertain fate of some 40,000 French door refrigerators.

The appliances, and how they were tested for energy efficiency, were front and center during yesterday’s court hearing. In November, the Department of Energy ordered LG to change the way it measured its refrigerator-freezer units’ electricity usage, and ordered that the company remove all “Energy Star” stickers from certain models that were in the market as of Jan. 2, 2009. It gave the company until Jan. 20 to take off the labels, which the government uses to promote energy efficient products.

LG filed suit in December, claiming the government had changed testing standards it issued in 2008 without following the proper procedures. Yesterday in court, the company asked for a preliminary injunction, which would let it keep the stickers.

LG had already agreed to meet the government’s new testing standards on units manufactured as of today (Jan. 12), Martella said. But without the Energy Star seal of approval, it would be difficult, if not impossible, to sell the remaining units, which were already in stores or on boats, waiting to be shipped. Moreover, he said, being forced to remove the stickers would be a public relations disaster among potential shoppers, and effect sales of LG’s other product lines.

“It’s not just these 40,000 units that have yet to be sold,” Martella said. “It’s really the lingering damage to reputation,” he said.

In 2008, the Department of Energy issued an agreement with LG governing how it would test its refrigerator-freezers for efficiency. Martella told Judge Bates that in effect, the agreement was a rule making for the industry on the whole, and that the government hadn’t gone through the correct steps to change it.

“We have a new Energy Department that has stated it intends to be more aggressive about energy efficiency,” Martella said. “LG supports the administration. We only ask that they follow the agreement.”

The Justice Department’s John Coleman, representing the Department of Energy, said LG was twisting the meaning of its 2008 agreement. It said the document was a temporary deal that only applied to LG. The company was only supposed to use the standards the agreement set out to test a limited number of models, and leaving the stickers on would dupe costumers, undermining the Energy Star program, he said.

“To the extent that it causes LG economic harm, I would submit that it is also helping consumers,” Coleman said.

Judge Bates, for his part, seemed somewhat skeptical of both sides. He pointed out that the Energy Department had allowed LG to sell Energy Star labeled fridges using the lower testing standards for about a year. He then asked if the department planned to issue warnings to customers who had already purchased the fridges (Coleman said they were not). On the other hand, he told Martella that the 40,000 unsold fridges would only put a “miniscule” dent in LG’s revenue. And as for the potential damage to LG’s reputation, he said it might not be relevant.

“Reputational harm is not something very well accepted in the D.C. circuit as a reason for a preliminary injunction,” he said.